by John Darer CLU ChFC MSSC CeFT RSP CLTC
Investors in structured settlement payment receivables may not receive an IRS Form 1099 from the life insurance company that issued the underlying annuity, even though there has been a direct assignment of structured settlement payment rights. This does not mean that no taxes are due.
The question arose when an investor contacted New York Life and was told that they would not receive a 1099, by a representative in the New York Life customer service department. The underlying structured settlement payments were (1) payments for worker's compensation under IRC 104(a)(1) payments, or (2) for damages on the account of personal physical injury or physical sickness. However, the income tax exclusion under IRC 104(a)(1) or IRC 104(a)(2) would only apply to the initial payee and their named beneficiary. It does not apply to the investor.
Despite the sometimes intellectually dishonest marketing by firms selling assigned structured settlement payments (or subsets of those rights) to investors as annuities, be forewarned that acquired structured settlement payments rights (properly termed "structured settlement receivables") are not recognized as annuities or insurance products by the National Association of Insurance Commissioners(NAIC).
26 U.S. Code § 61 - Gross income defined
(a)General definition Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
Outright investment made with after tax dollars
If you simply paid $100,000 in 2012 to buy someone else's $198,200 lump sum structured settlement payment due in 2022, you will have to declare the $98,200 difference whether or not you received a 1099.
If you receive a 1099 it may come from the life insurance company if you have a direct assignment of structured settlement payment rights by court order, or it may come from a third-party payment servicer if you invested in a subset of an assignment of structured settlement payment rights.
What if the Structured Settlement Investment Was Purchased in a Roth IRA?
Note however, if the purchase of structured settlement payment rights was made with funds in your Roth IRA, are an asset of your Roth IRA, and the distribution is made after the account has been open at least 5 years, you may qualify for tax-free withdrawals of both Roth IRA contributions and any accumulated earnings.
What is a Roth Conversion?
A Roth conversion is a strategy that allows you to pay income taxes on some or all of your retirement assets today, rather than when you withdraw them in retirement. Certain financial advisers were advising clients to do a Roth Conversion and to use the proceeds to buy factored structured settlement payment rights held in the Roth IRA.
Your eligibility to contribute to a Roth IRA is subject to your level of income. If you file taxes as a single person, you can contribute to a Roth IRA only if your Modified Adjusted Gross Income (MAGI) is less than $161,000 for the tax year 2022. If you are married and file taxes jointly, the IRS allows you to contribute to a Roth IRA only if your MAGI is under $240,000 for the tax year 2024.
26 U.S. Code § 408A - Roth IRAs
Last updated May 6, 2024
by John Darer CLU ChFC CSSC RSP
We're a mere month away from "The Ides of March" and the ELNY Liquidation hearing that takes place at the Nassau County, New York Supreme courthouse in Mineola, New York on March 15, 2012. The structured settlement watchdog believes that it's important to look at the industry's warts rather than keep 'em buried. One way to do that is through the voices of the structured settlement annuitants potentially affected.
Bill, a West Virginia resident who has been receiving structured settlement payments from ELNY, wrote this to me at lunch time today:
"One question that I wonder about? Do the lawyers, insurance writers and insurance industry realize the suffering we have already been through by our injuries & now with the loss (reduction) of our income, will they still be able to sleep at night as we are forced into bankruptcy and made to suffer extreme hardships because of their greed? When I look at the amounts of loss by my peer group, the higher the amount of loss, I know the greater the suffering they have endured and will endure into the future."
Clearly some Executive Life of New York structured settlement annuitants are going through an emotional and financial holocaust. It's a difficult subject for some in my industry to broach, but we must make this "journey" to spread the enduring message "Never Again!"
This is not an anti structured settlement message. Far from it.
The lessons learned by regulators in New York and other states have led to reforms. In the early 1980s, when bad decisions by regulators were made, that allowed products to be sold that projected values based on the increasing amount of "flotsam and jetsam" in New York admitted insurer's portfolios, there was no massive Internet. There was no social media. Then some might have been more inclined to smoke hash when today they might be inclined to use some "#hash tags". Today's commentators would be all over ELNY (and those who promoted it) like stink on poop, with unrelenting questions and by any means of communication possible.
It's one of the reasons why I believe we need to see regulation of the tertiary market for structured settlement payment rights. Such payment rights if sold to investors, including by some to injury victims, may not have the statutory protections afforded those who receive structured settlement payments as damages or compensation. Despite the fact that such vehicles have been labeled on the Internet as annuities, they ARE NOT annuities.